I don’t know about you, but I’m ready to see 2022 in the rear view mirror. But before you turn that calendar page and close the book on this difficult financial year, take a bit of time to set yourself up for financial success in 2023. Spend the last month of 2022 reviewing what went well for you financially and what can be done better in the coming year.
Here’s my eight-item, year-end essential financial checklist:
- Spend an hour or two doing a review of the last year.
First, sit down with a paper and pen (or computer, if you prefer), as well as whatever financial records you have from the last 10 to 12 months. This may be your budget document, an app such as Mint, or your bank’s website. You want to look at your income, your spending, your debts, and your goals. Did you meet your goals or fall short of them? Did you make progress toward paying off debt? Did your income decrease or increase? Did you notice any changes in your spending? Be honest with yourself and get a realistic picture — approach this without judgment or self-criticism, but instead with a positive attitude. This isn’t about beating yourself up — that’s not productive. Instead, it’s about making a few adjustments that can make a big difference.
- Set your financial goal(s) for the next year.
It’s tempting to get carried away with goal setting, but be realistic about what you can feasibly improve. Strive to set one or two goals and establish a plan to reach them. As the saying goes, a goal without a plan is just a wish. Putting systems in place will help ensure you can reach your goal rather than just wishing for it to come true.
Perhaps you want to save up for that long-awaited trip? Pay off your car or buy a new one? Create an emergency fund? Increase your retirement savings? Or start a college savings plan for your kids? Maybe you want to pay off that credit card or student loan, or pay for home improvement? Perhaps it’s possible for you to set aside $20 a week or $100 a month … or more! Maybe by eliminating one or two expenses, such as a subscription or a weekly Starbucks run, you can channel that money toward your goal.
- Talk to a CPA about your tax standing.
Before 2022 is over, you might want to make some adjustments to your tax withholding. If your income changed significantly this year (and for many it did), whether it went up or down, you might be concerned about owing too much tax. Schedule an appointment with a CPA for a year-end review. We can work with clients to make a few tweaks that could benefit your tax position for the coming year.
- Consider Health Savings Accounts (HSAs).
If you have a high-deductible health insurance plan and are not enrolled in Medicare, you may qualify for an HSA, which is a savings plan specifically designed to help people pay for medical expenses. You may contribute up to a maximum amount per year ($3,650 for self-coverage and $7,300 for family coverage). This is an investment I recommend, if you qualify. Doing so not only lowers your taxable income for that tax year, but if the money is used on medical expenses, you will never owe any taxes on it. Plus, if you don’t use the money during that year, it can roll over to the next year. Health care costs are on everyone’s minds since the pandemic, so this could help to ease your mind, particularly if you foresee you will incur medical costs in the near future.
As a side note, I often am asked about whether Flexible Savings Accounts (FSAs) are similarly a good idea: I don’t really like them. An FSA, which is usually offered by an employer, requires you to predict at the beginning of the year how much money you will need to spend on health care in the next 12 months. If you put this money aside and don’t end up using it all, you lose access to the money. Though it’s better than no medical savings at all, in my opinion, the rules on FSAs are too inflexible to make this plan advantageous for everybody.
- Understand how student loan debt relief may affect you.
As I write this, the Biden Administration has begun notifying certain federal student loan borrowers that their loans are approved for forgiveness — but that the program currently faces a number of legal challenges, affecting its ability to discharge the debt. Applications for relief are no longer being accepted at this time.
What does this mean for you? If debt relief goes through in 2022, you will not owe federal taxes on the forgiven debt through 2025, but depending on what state you live in, you may owe state and county taxes. At the time of this writing, Indiana, Minnesota, Mississippi, and North Carolina all plan to tax forgiven student loans, and Washington and Arkansas are considering doing the same. Please talk to a CPA about your particular circumstances if student loans are among your current debt load, so you’re prepared for what happens next.
- Review your Social Security and disability benefits.
Each year, every American can download a statement from the Social Security Administration that details how much retirement savings have been put aside for you by the government. Those of us who are still far from retirement usually don’t check at all. But it’s a good idea to review the annual statement. If there’s income on there that isn’t yours or other erroneous information, it could be an indication of fraud.
If you want to receive your Social Security Statement by mail, print and complete a “Request for Social Security Statement” (Form SSA-7004) and mail it to the address provided on the form. You should receive your paper Social Security statement in the mail in four to six weeks. (Source: https://www.ssa.gov/forms/)
There is also a new planning consideration with the 8.7% COLA (Cost-of-Living Adjustment) in 2023. In general, the later you retire (between ages 62 and 70), the more money you receive each month (until this flattens at age 70). This means you should consider whether earning higher benefits as early as 62 years of age would change your plans about when to retire. The expected average annual increase in benefits is $200 per month. I recommend that everyone have a conversation with a CPA about when it might be a good time to retire, and how to make the decision based on this new cost-of-living increase.
Also, if you’re receiving federal disability benefits, check to make sure you’re still eligible. People who haven’t worked for five out of the last 10 years lose these benefits. Getting back into the system takes slightly over $6,000 of Social Security annual income, so it’s easy to maintain your benefits, but it can be very painful to lose them.
- Review your designated beneficiaries.
I’ve seen it happen: A married couple splits up, one of them dies before making changes to the beneficiaries on a life insurance policy, and the ex receives the entire sum. If you’ve had any major life changes — a new child, a new spouse, a divorce — it’s time to take a look at your beneficiaries on all accounts and make sure all the information is correct.
- Review your credit report.
Every American is entitled to a free credit report from each of the big three credit-reporting agencies (Equifax, Experian, and TransUnion) each year. Getting hold of all three of them can, admittedly, be trickier than it should be, but even getting two of them should give you a good picture of your credit rating. Review it to be sure that nothing looks amiss. Be sure that any late payments are correct or amended and nothing is a surprise. Anything that doesn’t look right is likely to be a simple reporting error, but it could also be an indication of fraud, so go over it carefully and take steps to make necessary corrections. The result could be an improved credit score, so it’s worth your time.
Speaking of fraud, credit card fraud is at an all-time high. Be sure you look at all bank and credit card account statements regularly (I advise doing so every week, at least), and be sure that you sign up for any bank alerts on any large transactions. It’s better to have your bank question legitimate transactions than to let questionable ones slide.
If you’re ready to make improvements to your financial picture but don’t know where to start, give us a call! We’re happy to make a year-end appointment with you to go over your current financial picture and make a few recommendations that can get you started.